Getting the most out of your employees.

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As an employer you may encounter times where a private/independent contractor (1099) fits your needs the best. A private contractor has a different employment status that affects their tax filing, how much they pay in taxes, and when they pay.

For a W-2 employee, you (the employer) withhold a certain amount of their paycheck each pay period based on their deductions and remit that on their behalf. You make quarterly income tax payments, annual payments and keep track of everything with your payroll system. You also pay half of the FICA; The Federal Insurance Contributions Act is the federal law that requires you to withhold two separate taxes from the wages earned. It includes Social Security Tax and Medicare Tax at a flat percentage rate. The Social Security Tax is 6.2% rate of earned wages, and the Medicare Tax is 1.45% of earned wages (2018).

When you pay a private contractor they are responsible for making all their own tax payments, including FICA. They will need to cover their own self-employment tax obligations. You still need tax forms filled out, including Form W-9 and the 1099-MISC. You won’t need to send the W-9 anywhere but you will keep it on file for at least 4 years.

Form W-9 verifies your freelancer’s name, address and Taxpayer ID Number so they can pay their own taxes to the IRS. They will need to mark themselves as exempt from withholding taxes as they file on their own.

Form 1099-MISC needs to be addressed every January. If you’ve paid your independent contractor more than $600 in the past calendar year then a 1099 is required.

Another good practice for working with contractors is record keeping. Hold on to every single document related to your work and their employment, like contracts, invoices, proof of payment, bills, and more. The easiest way to accomplish this is to add your freelancer to your payroll, that way each payment is tracked and all records are kept within that department.